Officials on the Take Damage an Economy

ByDavid R. FrancisOctober 8, 1993

THE Russian government better put a lid on corruption if it wants to make rapid economic progress.

That's what economists say. Their argument is not based on ethical grounds, though many are concerned about those issues. It is based on economic analysis and research.

``Corruption is both pervasive and significant around the world,'' notes Andrei Shleifer, a Harvard University economist, and Robert Vishny of the Graduate School of Business at the University of Chicago. ``In some developing countries, such as Zaire and Kenya, it probably amounts to a large fraction of the gross national product.''

``Africa is reputed to be a very corrupt continent,'' they write in a recent National Bureau of Economic Research paper. ``It is also the poorest one. Latin and South America are also known for the extreme corruption and poverty. In contrast, developed countries appear to be less corrupt.''

In the case of Russia, the economic damage from corruption has grown since communism expired. Under communism, Russia had a monolithic bribe collection system benefiting a relatively small number of bureaucrats and enterprise executives.

That's not the case now. ``To invest in a Russian company, a foreigner must bribe every agency involved in foreign investment, including the foreign investment office, the relevant industrial ministry, the Finance Ministry, the executive branch of the local government, the legislative branch, the central bank, the state property bureau, and so on,'' the two economists write. ``The obvious result is that foreigners do not invest in Russia. Such competing bureaucracies, each of which can stop a project from proceeding, hamper investment and growth around the world, but especially in countries with weak governments.''

Presuming President Boris Yeltsin has strengthened his government by crushing the opposition, Moscow could make moves to stop the rampant corruption in the Russian bureaucracy that has deterred foreign investment.

Corruption hurts an economy not only because the bribes can be expensive, but because it causes inefficiency by distorting economic decisions. Since corruption usually demands secrecy, bureaucrats may prohibit the import of goods on which bribes cannot be collected without detection, and encourage imports of goods on which they can collect bribes.

``The menu of both consumer and producer goods available in the country is determined by corruption opportunities rather than tastes or technological needs,'' Mr. Shleifer and Mr. Vishny write. ``This argument might suggest why so many poor countries would rather spend their limited resources on infrastructure projects and defense, where corruption opportunities are abundant, than on education and health, where they are much more limited.''

The social and long-term economic costs can be huge from such distortion.

``The demands of secrecy can also cause leaders of a country to maintain monopolies, to prevent entry [of enterprises], and to discourage innovation by outsiders if expanding the ranks of the elite can expose existing corruption practices,'' they add. These factors discourage useful investment and retard growth.

The two maintain that bribery can be reduced by economic and political competition. Corruption will be driven down if different agencies or agents compete in the provision of the same services. But if agents can steal (e.g. let an import into a country duty-free in return for a bribe), even competition in a bureaucracy won't work. Competition among politicians opens up the government, reducing secrecy, and usually deterring corruption.

Julius Tahija, a former chief executive officer of Caltex Pacific Indonesia, writing in the latest issue of the Harvard Business Review, says that despite cultural differences, honesty is honesty anywhere in the world. ``Corruption is always and everywhere an impediment to business as well as to morality. Corruption wastes resources, discourages investment, cuts productivity, and nurtures enterprises whose success can only be temporary.'' Transnational companies, he adds, can play a central role in transferring sound commercial ethics across borders.

Thus Russia, if it allows in foreign companies by discouraging corruption, could benefit economically - and ethically.